Exclusive: Eurobank CEO expects to beat bad debt reduction target

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ATHENS (Reuters) - Eurobank is confident of beating this year’s sour loan reduction target agreed with European Central Bank supervisors and plans to make further progress by 2021, the chief executive of Greece’s third largest lender said on Monday.

So-called non-performing exposures (NPEs) are the biggest challenge facing the country’s banking sector, hit hard by the euro zone’s debt crisis and years of deep recession.

Central bank data this month showed the total stock of NPEs on Greek banks’ books amounted to 88.6 billion euros ($103.1 billion), or 47.6 percent of their combined loan book, at the end of the second quarter.

“There is no doubt that successful NPE management will be the litmus test for us,” CEO Fokion Karavias told Reuters in an interview. “We are fully aware of the challenge, but recent results allow room for rational optimism.”

Banks have been under regulatory pressure to tackle the bad debt problem, which restricts their ability to expand credit and assist the economy’s recovery.

European Central Bank board member Benoit Coeure said this month reducing the burden of sour debt should be a top policy priority for Greece’s banking sector.

“There is a strict, specific and granular plan agreed with our regulators on which Eurobank overperformed in 2017. We have a vastly improved institutional framework now in place and are on track to outperform again this year,” Karavias said.

Eurobank’s target in Greece is to reduce its stock of NPEs to 15.6 billion euros, and Karavias said he was confident the bank would achieve a figure of around 15.3 billion euros.

The bank also has plans to securitise 2 billion euros of non-performing mortgage loans, which it expects will be wrapped up by mid 2019.

That transaction, coupled with a toolkit of loan workouts and collateral liquidations, will help the group meet its 2019 target and shrink the NPE stock by another 3.5 billion euros.

The securitisation will feature three tranches - junior, mezzanine and senior - with the first two carrying most of the risk, Karavias said.

“We plan on selling the junior and mezzanine tranches and keeping the senior one on the balance sheet,” he said. “This transaction enhances our confidence that we will again deliver on our targets in 2019.”

Looking further ahead, Eurobank will soon present plans to reduce its NPE ratio to a mid-teens level in 2021, down from a peak of 45 percent at the end of 2016.

“The plan is ambitious, but I have no doubt it is realistic and feasible,” Karavias said. “Taking into account Eurobank’s resilient pre-provision income, I am confident it can be implemented without impacting our capital base.”

Asked about the outlook for Greek government bonds, with the country now out of its bailout program and keen to restore full market access, Karavias said yields had room to come down.

“There is room for further improvement as markets will start to price in that at the start of an electoral cycle all major political forces subscribe to the commitments Greece has undertaken towards international creditors.”